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Quotation of the Day…

… is from page 202 of Gerald P. O’Driscoll’s and Sudha R. Shenoy’s incisive 1974 essay, “Inflation, Recession, and Stagflation,” which is Chapter 7 in The Foundations of Modern Austrian Economics (Edwin G. Dolan, ed., 1976) (footnote omitted):

But even if monetary expansion proceeds at a constant rate, price expectations and real scarcities by no means obviate all the discoordinating effects of such a continuous disturbance; for it is not a matter of transactors’ coming to anticipate the average increase in a set of prices – that is, the change in a price index.  The impact on individual prices is still somewhat unpredictable, and hence profit margins on particular capital goods will continue to differ from expectations, because of purely monetary influences; some capital dislocation will thus continue.

Insofar as prices contain information that guides each of many individuals’ actions – that is, insofar as individuals rely for guidance upon the information contained in prices – individuals cannot legitimately be assumed to know underlying economic realities independently of prices.  If individuals already know, independently of current prices, the uncountable multitude of details that are the underlying economic realities – for example, relative resource scarcities, changes in consumer demands across different consumption goods, and changes in households’ time-preferences – then the role of prices is much more attenuated than most (at least market-oriented) economists believe that role to be.

Put differently, if prices are necessary to coordinate decentralized economic decisions across millions of people, over thousands of square miles, and through time, then the bits of information that each price (or price change) is understood to convey in order to achieve this unplanned coordination cannot be assumed to be known to, or even knowable by, individuals independently of prices and price changes.